Lessons from China's Lenovo

GLOBAL BOARD • B y Michael Useem and Neng Liang Globalizing the company board: Lessons from China’s Lenovo others in India, and state holders over what is less understood is how compa- “The board of directors others in China. nies remake their boards to reflect the The sustained growth of the Indian emerging reality of global equity and has the important role of and Chinese economies, however, has operating markets. This article seeks to overseeing management forced regulators, shareholders, and identify the process by which company performance on behalf of companies in both countries to reex- leaders are restructuring their gover- shareholders” amine their governance practices for nance through investigation of how two reasons. First, international inves- one of China’s more prominent com- tors increasingly moved cash across panies, Lenovo, transformed its board country lines, and as they took greater following acquisition of IBM’s personal he rise of the Indian and Chi- ownership in publicly traded companies computer operation in 2005. nese economies during the past outside their home countries, they also Founded in 1984, Lenovo had Tdecade is transforming how brought home-country biases for inde- emerged two decades later as China’s executives and directors think about pendent, informed, and even-handed largest computer maker. It had cap- company governance. In both coun- directors. Second, Indian and Chinese tured 27 percent of China’s rapidly ex- tries, corporate boards had traditionally executives increasingly moved their panding computer market, with annual played a modest role in company de- operations across national boundaries, revenue exceeding $3 billion. The com- cisions. And even when more actively and as they entered demanding in- pany concluded, however, that its long- involved, they had often pulled deci- ternational markets, they also learned term growth depended on its becom- sions toward objectives not entirely in that independent, informed, and ing an international player, just as many keeping with governance ideals. If di- even-handed directors can constitute a American and European companies rectors are in theory the eyes and ears source of company advantage. had concluded in years past. “In our of all company owners, in practice they The broader outlines of these world,” explained executive chairman sometimes favored family owners over trends are reasonably well known, but Yang Yuanqing, “a high growth rate is CORPORATEGOVERNANCEASIA 01 APRIL-JUNE 2012 GLOBAL BOARD hard to sustain if you only try to maintain yond its manufacturing and sale of per- your position in the China market.” sonal computers in China, but that effort After thirteen months of negotia- largely failed. In the meantime, its PC tions, Lenovo and IBM announced that dominance within the Chinese market Lenovo would acquire IBM’s Personal was coming under increasingly success- Computing Division for $1.75 billion. ful attack by Hewlett-Packard, Dell, and Founder Liu Chuanzhi declared that glo- other foreign and domestic makers. In balization had become a necessity, the 1994, Lenovo held 4 percent of the Chi- company’s only option for growth and nese PC market, and by 2000 its fraction survival. In the months that followed, had risen to 29 percent, but its market Lenovo restructured its governing board share then dropped back to 27 percent as well, and we focus here on that in 2003 and 26 percent in 2004. Top change. management concluded that for con- tinued growth, international expansion Two Conceptions of had become essential. It also concluded Corporate Governance that it would have to change its original Before we enter the boardroom, it is use- name—Legend—to Lenovo, because ful to identify the major potential areas the name of Legend was already used by in which directors may make decisions. other companies in other countries. We are primarily concerned with direc- Michael Useem, William and Jaclyn Egan At the time, however, Lenovo had tors’ explicit involvement in company de- Professor of Management and Director no foothold outside greater China. By cisions and the criteria that they apply in of the Center for Leadership and Change coincidence, IBM approached Lenovo reaching those decisions under varying at the Wharton School of the University of on the possibility of the Chinese com- market conditions. From prior research, Pennsylvania, USA. pany acquiring IBM’s personal-comput- theory, and experience we anticipate er division, and Lenovo’s management that directors engage in two areas of de- Partnering with Management: A swiftly embraced the offer, even though cision making, each with its own set of long-standing additional conception IBM’s operation drew four times the distinct criteria. of corporate governance suggests that revenue of Lenovo. But IBM was los- Monitoring Management: One well- directors are decision partners with the ing money on its personal-computer established conception of the firm views top executives, joining with them in sales, and Lenovo’s due diligence con- directors as largely serving as the eyes making the company’s most important vinced management that it could turn and ears of the shareholders, ensuring choices. Directors are seen as co-pro- the much larger IBM operation around. that company executives conduct them- ducers of the firm’s strategic decisions. “We finally came to believe that in selves properly on behalf of the own- This is the informal view that business IBM’s hands the PC division would con- ers. The decisions that directors take are executives often take of themselves. tinue to suffer annual losses,” reported therefore inferred or prescribed to be The chief executive of a large financial- Liu Chuanzhi, then executive chairman directed at monitoring the decisions that services firm, for instance, spoke for of Lenovo, but he felt that in his own executives make. This is the formal view many in describing the decisions that hands the IBM operation “could be that big business sometimes even takes directors reach in his boardroom. They profitable.” That conclusion was partly of its own boardrooms. “The board of are, he said, those that are “strategi- based on analysis of overhead that the directors has the important role of over- cally impactful” and those that will IBM parent allocated to its PC division. seeing management performance on be- “change the future.” If a company’s The division would have been profitable half of shareholders,” declared the U.S. executives are seeking to integrate were it not for the high headquarters Business Roundtable, and “directors are newly acquired international opera- overhead imposed on it. And it could diligent monitors, but not managers, of tions, for example, directors may col- have been even more profitable had business operations.” By way of illustra- laborate with the executives in reach- it adopted Lenovo’s lean manufactur- tion, directors often take decisions to en- ing key decisions on how to optimize ing methods. Assembling a PC in the sure that their executives do not enrich the process. United States at the time cost $24, themselves at the expenses of sharehold- compared with $4 in China. ers, nor that they enter into sweetheart Lenovo Goes Global Lenovo announced the IBM acqui- deals with other companies controlled by During the late 1990s and early 2000s, sition on December 7, 2004 at a Beijing the executives’ families. Lenovo had attempted to diversify be- news conference attended by some five CORPORATEGOVERNANCEASIA 02 APRIL-JUNE 2012 GLOBAL BOARD hundred Chinese and Western journal- dustry CGQ. The CGQ scores represent ists, and it completed the acquisition in a company’s percentile ranking, with a April 2005. From a dominant but fal- “All of this work requires score of 50 implying that the company’s tering place in the Chinese computer an unprecedented degree governance ranks better than half the market, Lenovo became a substantial of professionalism, dedi- comparison firms and worse than half. and rising force in the global computer cation, and fine-grained Lenovo’s governance ranked at market. The IBM acquisition moved about the 25th percentile on both mea- Lenovo from the eighth to third larg- knowledge on the part of sures during the year of the acquisition est computer maker worldwide after today’s board member” (the first year ISS appraised Lenovo’s Dell and Hewlett-Packard. In the year governance). During the two years after the acquisition, Lenovo doubled that followed, however, Lenovo had its workforce to twenty thousand and ecutive were both Chinese; coming out elevated its governance ranking above quadrupled its revenue to $12 billion. of the acquisition, the executive chair- the 40th percentile compared with all To appreciate the governance im- man was Chinese and the CEO Ameri- companies, and above the 50th percen- pact of this transformation of a largely can. Of the top management team in tile compared with other firms in the domestic Chinese manufacturer into 2004, all were Chinese; of the eighteen technology hardware and equipment a significant international maker, we members of the top management team industry. By these measures, Lenovo interviewed the key decision makers in 2007, six were from greater China, had moved its outward features of gov- in 2007–2008. They included Liu Ch- one from Europe, and eleven from the ernance for monitoring management uanzhi, Lenovo’s founder and executive United States. Ma Xuezheng, the com- into the middle ranking of company chairman just prior to the IBM acquisi- pany’s CFO at the acquisition moment, governance worldwide. tion; Yang Yuanqing, Lenovo’s chief declared at the time, “This is going to executive before the acquisition and be very much an international company Partnering with Management executive chairman afterward; William operated in an international fashion.” Our interview evidence also points to- Amelio, Lenovo’s second chief execu- Compared with publicly traded ward a transformation of the Lenovo tive officer; Shan Weijian, a non-exec- companies worldwide, Lenovo’s post- board to include a partnership with utive director of Lenovo representing acquisition governance reached inter- management.

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